Cashing In

Why shouldn’t I hold cash?

If you’re looking to lower your risk — in a difficult market or when you’re nearing retirement, for example — you may be tempted to take assets out of the market and put them in cash. Over the long term however, cash may not be as safe as you think. Let’s look at some of the implications of moving your investments to cash and keeping them there for long periods.

Rethink the Cost of Cash

The chart below shows compound annual returns for stocks, bonds and cash over the period from 1926 to 2013 and compares nominal returns with returns accounting for inflation and taxes.

Front of Chart

As the chart shows:

Historically the return of cash has been negative on average, after accounting for inflation and taxes.

Likewise, the real return of bonds has been barely positive.

Only stocks have historically yielded a substantial return after factoring in both inflation and taxes. Stocks can be a vital part of a portfolio not only for growth but also for capital preservation.

A False Sense of Security

As you get closer to retirement, the lower short-term risk of cash and bonds may seem appealing. But these investments carry a different risk: their lower returns could cause you to outlive your assets.

The chart below compares the longevity of several hypothetical $500,000 retirement portfolios with different asset allocations.

Back of Chart

As the chart shows:

Assuming 5% inflation-adjusted withdrawals, a 100% cash retirement portfolio would run out of money in 21 years. The fixed income portfolio would last only two years longer.

A portfolio comprising 100% stocks would experience more volatility, but it would last at least 30 years, with assets remaining.

While you may not be comfortable with an all-stock portfolio, a diversified portfolio that includes stocks is an important option to consider. Such a portfolio performed second best in this illustration and may help protect you from outliving your savings.